1 Beijing’s ‘new real estate development model’ could hurt more than help the PRC in the short term
‘New real estate development model’
Nov. 13
State media Xinhua published an exclusive interview with PRC minister of housing and urban-rural development Ni Hong with the headline, “Building a New Real Estate Development Model and Promoting High-quality Real Estate Development” (建構房地產發展新模式 推動房地產高品質發展). In the interview, Ni answered reporters’ questions about the effectiveness of the PRC’s real estate adjustment policies introduced in 2023, how to gauge the real estate market, and how to reconstruct a new model of real estate development.
Noteworthy parts of Ni Hong’s interview with Xinhua include:
- On the real estate situation:
- Ni said that the problem of housing “availability” (有沒有) has been basically resolved “on the whole from the supply side,” but the problem of “structural inadequacies” still exists.
- Citing data from the Ministry of Housing and Urban-Rural Development’s national digital housing information system, Ni noted that the transaction volume of second-hand housing increased even though the transaction volume of first-hand housing declined from January to October 2023, and that the combined transaction volume of first and second-hand housing saw positive year-on-year growth. Ni also said that the completed area of housing nationwide increased by nearly 20 percent from a year ago in 2023.
- On building a new model of real estate development:
- Ni said that the stance of “houses are for living in, not speculation” should always be adhered to.
- Ni said that a “new mechanism” would be established to “determine housing based on the people, determine land based on the housing, and determine investment based on the housing” (以人定房, 以房定地, 以房定錢) and prevent drastic market fluctuations.
- Ni spoke about the necessity of implementing the “three major projects,” or planning and building affordable housing, renovating urban villages, and constructing emergency public facilities for “normal and emergency uses” (平急兩用).
- Ni called for meeting the reasonable financing needs of real estate enterprises with different ownerships without discrimination.
Nov. 14
Bloomberg News reported that the PRC plans to provide at least 1 trillion yuan of low-cost financing to its urban village renovation and affordable housing programs, citing people familiar with the matter. The plan is a part of a new initiative by PRC vice premier He Lifeng to put a floor under the property downturn in China, according to Bloomberg.
The people said that the People’s Bank of China would inject funds in phases through policy banks, with the money ultimately trickling down to households for home purchases. The people added that officials are mulling options including the Pledged Supplemental Lending (PSL) and special loans, and that the PRC authorities may make the first move as soon as in November 2023.
Bloomberg noted that the outstanding amount of funds lent through the PSL program stood at 2.9 trillion yuan as of October 2023, and a net injection of 1 trillion yuan would take the total funds lent past the previous record in 2019. The people familiar with the matter said that the final amount of the new funding is subject to change.
PSL, which is sometimes referred to as “helicopter money,” allows the PBoC to provide low-cost funds through commercial and policy lenders to developers of shantytown renovation projects. Developers would use the funds to buy land from local governments, which in turn give cash subsidies to households whose previous homes were demolished to purchase newly built or existing apartments.
Construction of affordable housing
The CCP Central Committee has publicly raised the issue of constructing affordable housing several times since the start of 2023.
On Aug. 25, an executive meeting of the State Council reviewed and approved a “guiding opinion” on the planning and construction of affordable housing (關於規劃興建保障性住宅的指導意見). Mainland media reported that the “guiding opinion,” or the “No. 14 document” (referred to as such because it is the fourteenth in a series of documents on national development) had been disseminated to local governments in various cities and agencies directly under ministries and commissions, and the contents of the document currently being implemented.
Key points in the “No. 14 document” include:
- The goal is to establish a dual-track system of market-oriented commercial housing and affordable housing.
- The targets of affordable housing are salaried income groups with housing difficulties and low incomes, as well as groups such as “imported talents” needed by cities.
- The targets of affordable housing are only allowed to purchase one affordable home per family.
- Local governments are responsible for supplying land for affordable housing and the construction of ancillary facilities on an allocated basis, operating in a market-oriented manner, and selling affordable housing on the principle of preserving capital and making a small profit (保本微利).
- The conversion of affordable housing into commercial housing for sale is prohibited. Local governments have to repurchase affordable housing from owners who have long vacated the premises, who have been transferred out of their job, or who have left their government, public institution, or private enterprise work unit due to resignation or other reasons.
- The affordable housing program will be piloted and implemented in large cities with a permanent urban population of more than 3 million. There are currently 35 cities that fulfill the criteria, including Shanghai, Beijing, Shenzhen, Chongqing, Guangzhou, Chengdu, Tianjin, Wuhan, Dongguan, Xi’an, Hangzhou, Foshan, Nanjing, Shenyang, Qingdao, Jinan, Changsha, Harbin, Zhengzhou, Kunming, Dalian, Nanning, Shijiazhuang, Xiamen, Taiyuan, Suzhou, Guiyang, Hefei, Urumqi, Ningbo, Wuxi, Fuzhou, Changchu, Nanchang, and Changzhou.
- Land for affordable housing will be supplied through allocation, and only the corresponding land cost will be paid. Also, affordable housing can be constructed on recovered land (i.e. land where approvals for housing construction have been granted but no construction has commenced), reappropriated from commercial housing or constructed on land that have been disposed of by bankrupt real estate companies, and reappropriated from unused housing. Unused and inefficient industrial, commercial, office, and other non-residential lands can also be “conditionally utilized” for the construction of affordable housing.
- Existing commercial housing in cities with a large inventory of commercial housing may be appropriately renovated or purchased to be used as affordable housing.
Big picture
Property sales in China remain sluggish despite the CCP authorities’ introduction of policies since the start of the year to stimulate the market.
Meanwhile, the authorities arrested China Evergrande’s Hui Ya Kan and other top executives and Country Garden defaulted on a U.S. dollar bond.
Our take
1. The “new real estate development model” appears to be an effort by the Xi Jinping leadership to shift the PRC’s housing program from one that imitated Hong Kong’s pre-sale commercial housing model to something more akin to Singapore’s government-subsidized affordable housing model.
We see several reasons why Beijing is pushing the “new real estate development model” at this time:
a) The PRC authorities are looking to maintain demand for housing and mitigate the impact of a property sector “hard landing” as economic conditions worsen in China and the debt risks of real estate developers are being triggered.
Country Garden’s default on a U.S. dollar bond (a $15 million coupon) on Oct. 25 after it failed to make payment within a grace period bodes ill for the rest of the industry. China’s leading property developer is currently struggling to make money and service its debts, with its contracted sales between June 2023 and October 2023 totaling just 48.53 billion yuan, but its total liabilities at the end of 2022 was 1.44 trillion yuan. Also, Country Garden’s average interest rate on its liabilities is 5.73 percent per annum and it has to pay a monthly interest of nearly 7 billion yuan, according to mainland media. Other smaller property developers are likely to be in a similar or worse position as Country Garden.
The PRC’s 2020 data suggests that a “hard landing” for the property sector will significantly impact China’s economy:
- China’s real estate industry and its industrial chain accounted for 17 percent of China’s GDP (full contribution). The value added by the real estate industry accounted for 7.3 percent of the GDP (direct contribution) and the value added by the real estate industrial chain accounted for 9.9 percent of the GDP (indirect contribution).
- Investments driven fully by the real estate industry accounted for 51.5 percent of total investment in fixed assets. Meanwhile, investment in real estate development accounted for 27.3 percent of total fixed assets investment.
- The balance of real estate loans was 49.58 trillion yuan, or 28.7 percent of total loans (172.75 trillion yuan) in China.
- Land transfer revenue and real estate special taxes accounted for 37.6 percent of local fiscal revenue.
- The total value of the housing market was 418 trillion yuan, or 66.6 percent of the total market value of stocks, bonds, and property. The bulk of the wealth of Chinese citizens is tied up in real estate.
- The real estate industry employed about 15 million people in 2020.
Given the importance of real estate to the Chinese economy, the PRC authorities must find ways to keep it afloat. The “new real estate development model” is the latest stimulus measure.
b) Beijing’s adherence to “houses are for living in, not speculation” shows that the Xi leadership is determined to eliminate the real estate bubble and does not want excessive property financialization to weaken the real economy.
Concurrently, Beijing is looking to make finance serve the CCP’s “socialist construction” (i.e. financing “major strategies, key areas, and weak links,” etc.) and strengthen the regime’s ability to respond to the United States and Western decoupling and “de-risking” from China over the mid- to long-term.
c) Beijing’s proposal to “determine housing based on the people, determine land based on the housing, and determine pricing based on the housing” suggests that it likely suspects that China’s demographic challenges are very severe (see here and here) and population decline makes the earlier real estate development model no longer tenable.
Therefore, the PRC authorities are trying to tailor real estate development according to the population size of cities and prevent local governments from blindly pursuing real estate development which could result in more problems (local debt situation worsened, local real estate prices dropping sharply, etc.).
d) The PRC authorities’ construction of the “three major projects” is likely intended to help the real estate industry maintain its credit scale and mitigate the impact of a property sector “hard landing” by retaining some demand for the industry and its industrial chain.
On paper, Beijing’s affordable housing plan technically allows it to:
- Help developers clear inventory, complete unfinished apartments, and allow the authorities to absorb the assets of failed real estate companies.
- Attract labor and talents to meet the needs of its industrial strategic layout.
- Improve living conditions for married couples and create a more conducive environment to boost the fertility rate.
- Promote the “common prosperity” initiative and make the Chinese people more dependent on the government. This facilitates the maintenance of regime stability.
2. Aspects of the “new real estate development model,” as well as various constraints and deficiencies of the CCP authoritarian dictatorship, indicate that Beijing will still struggle to defuse the real estate sector crisis with the new policy and could even create greater problems for itself down the road.
a) The construction or allocation of affordable housing on a large scale would inevitably result in a sharp drop in property prices over time. Plummeting prices would in turn make things harder for developers, leading to more bankruptcies, unfinished projects, supply disruptions, and a substantial increase in non-performing loans for banks. Increased real estate company failures would lead to more defaults on U.S. dollar bonds, a phenomenon that would heighten negative views in the international community about investing in China and lead to more capital outflows.
Things are already not looking good for property prices. According to calculations by Shanghai E-House Real Estate Research Institute in July 2023, the average down payment ratio for first-time home buyers in 20 key cities in China was 24 percent. That means that if the average property price in China falls by more than 24 percent, then mortgaged real estate would have negative value.
Meanwhile, a widely circulated article published in November 2023 titled, “Housing Prices in Shenzhen Start to Plummet” (深圳房價開始踩踏) noted that commercial home prices in the central area of Shenzhen’s Bao’an District fell from between 4.2 million yuan to 4.3 million yuan to 1.85 million yuan (down more than 55 percent) recently, while home prices in other districts declined by more than 40 percent. Shenzhen is one of the benchmark cities for housing prices in China.
b) The “No. 14 document” allows local authorities and state-owned enterprises to acquire real estate assets from failed real estate companies (likely at low prices) and convert those assets into affordable housing. However, CCP officials are likely to “prefer left rather than right” and abuse this provision to engage in various illicit and corrupt activities to benefit themselves, including taking actions that facilitate the collapse of developers so that their assets can be more conveniently “reappropriated” by the authorities. The result is greater government corruption, rising local government debt, and worsening social instability.
c) Local governments troubled by fiscal and debt woes will find it challenging to implement the “three major projects” without adding to their current problems.
d) The PRC authorities would likely need to carry out tax reforms as they search for new sources of funding for local governments that are seeing reduced revenue from land sales but need money to better implement the “new real estate development model.” If so, we believe that the Xi leadership will consider imposing property and asset taxes on wealthy Chinese and other high-income groups. This would in turn prompt those groups to increasingly “vote with their feet” and leave the country with their wealth.
The Xi leadership could also confiscate some assets from the financial and business elite and their political backers as part of a broader effort to “rectify” the financial sector and system. Such moves could create intense political and economic turmoil in China in the short term, and the emergence of political Black Swans during this period could endanger the regime before it can reap any mid to long-term benefits that the “new real estate development model” might yield.
